(Bloomberg News) Michigan's "radical reform" 14 years ago to rescue its retirement system by placing newly hired workers in a 401(k) program may show struggling states the way back from the worst pension crisis ever.

Thirty-three states have assets less than 80 percent of what is needed to pay promised benefits, a common threshold for sustainability, according to an annual study of pensions by Bloomberg Rankings. Median funding fell to 73.7 percent from 76.2 percent in 2009, the data show, even as the U.S. economy rebounded from the deepest contraction since the Depression.

"This is a crisis that is requiring states and municipalities to evaluate and take real, pro-active steps," said William Jasien, executive vice president for institutional markets at ING U.S., a subsidiary of Amsterdam-based ING Groep NV that manages retirement programs for about half the states, including Michigan. They face "very volatile markets, funding pressures -- a lot of public eyes on these pension benefits."

Rating companies are now considering the liabilities in determining credit grades, and 40 states, including New Jersey, New York and Illinois, have taken such steps as increasing what employees pay into retirement funds and curbing cost-of-living increases for future retirees. California's $146.6 billion teachers retirement plan will ask lawmakers for money to diminish a $56 billion unfunded liability, which has more than doubled since 2008.

State and local pension assets dropped to $2.17 trillion by the end of 2009 from $3.2 trillion in September 2007, the largest dollar loss ever, said Keith Brainard, the Georgetown, Texas-based research director at National Association of State Retirement Administrators. Since then, assets have rebounded to close to $3 trillion, he said, the largest gain.

Michigan saw the crisis coming. In 1997, with its unemployment rate the lowest in at least two decades, the state placed all new employees -- including legislators, judges and other elected officials -- in a 401(k) as a way to head off future funding crunches. The idea faced little opposition.

Other states should copy the "radical reform," said Scott Beaulier, director of the Johnson Center for Political Economy at Troy University in Alabama. Michigan's pension-funding ratio was 78.8 percent in 2010 -- 18th best among the 48 states Bloomberg ranked.

"They were able to get around some of the challenges that other states face now," Beaulier said.

Michigan converted when its pension was well funded and the stock market was growing. Beaulier said it would be harder for states with large unfunded liabilities to make the switch now.

Taking the Risk